New Law Favors Lenders

Stuttgart apartment construction_Marijan Murat-dpa
Skies the legal limit?
  • Why it matters

    Why it matters

    Germany recently passed a new mortgage law intended to integrate national law with European mandates. But it seems to be heavily flawed, and will probably need an overhaul.

  • Facts


    • An estimated 13,000 new mortgages are issued to German borrowers every day.
    • Germany is undergoing a property boom, with house prices increasing 5.6 percent annually over the last five years, double the average annual increase since 1970.
    • A new German law to implement E.U. mortgage lending guidelines contains serious discrepancies.
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Within the European Union, Germany often plays the role of the stern superego, insisting that everyone plays by the rules. So it’s rather surprising that the country’s new law on mortgages appears to contravene E.U. regulations in several ways.

Though it was passed just two months ago, it already seems to need substantial revision. And this is no academic legal point, either. The country is in the midst of an unprecedented housing boom, with an estimated 13,000 new mortgage contracts signed every day. But not only are the new law’s deviations from E.U. law illegal, their burden also falls almost entirely onto the person taking out the mortgage, say consumer protection groups and members of the European parliament.

“The federal government has failed to correctly incorporate E.U. rules on mortgage loans into German law. They have treated consumer protection very shabbily indeed,” criticized Sven Giegold, a European parliamentarian with the environmentalist Green party who is planning to file a complaint to the E.U. Commission.

Because a particularly large number of Germans are due to receive inheritances in coming years, and many will likely use them to pay off their mortgages, the flaw poses a real problem, experts say.

The main problem lies with compensation payments that mortgage holders must pay to clear their mortgage early, thus in theory depriving their lenders of years of compounding interest. These so-called pre-payment penalties are legal under E.U. rules, but only to charge customers the extra costs accrued by the bank.

But the 2016 German “Law on Implementation of Mortgage Credit Guidelines” does not stipulate this as a mandatory item, noted Frank-Christian Pauli, a credit expert with the Federation of German Consumer Organisations. In addition, he said critically, German legislators failed to force banks to reveal the basis of their calculation of prepayment penalties. This means the mortgage borrower has no way of checking whether the amount has been correctly calculated.

Because a particularly large number of Germans are due to receive inheritances in coming years, and many will likely use them to pay off their mortgages, the flaw poses a real problem, experts say. In fact, it has wide-ranging implications across the mortgage credit business.

Although Germany is often seen as a nation unusually attached to renting, some 30.2 million people currently have mortgages to build, buy or modernize houses or apartments. These mortgages are often associated with contractual savings for housing, which can run up to 20 years, often held with mortgage companies connected with the nation’s savings bank network.

The 2016 law fails to deal with prepayment penalties and does not force banks to reveal the basis of their calculations.

Mr. Giegold, the E.U. parliamentarian, has discovered another gaping hole in the new German law. Under it, tie-in deals remain legal, even if they are of no value to the customer. For example, it is common to use tie-ins to link mortgages with building loan agreements or with legal insurance. But E.U. guidelines only permit these kind of agreements if they bring clear advantages for customers. This clarification is completely absent in the new German law, critics say.

Now that the flaws are being pointed out, Berlin will probably have to do some embarrassingly hasty repairs to the law. The E.U. Commission is examining the German legal implementation of their guidelines, and will likely send a warning letter to Berlin soon.

Jonathan Hill, the current E.U. Commissioner for financial stability and services, has been less keen to create new laws than his predecessor, Michael Barnier. Perhaps that’s the reason why Mr. Hill usually tends to stress that countries adhere to existing E.U. guidelines. Which means that Berlin has some explaining to do.


Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the author:

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